chapter 10 the government in the economy:...
TRANSCRIPT
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Part II: Foundation of Microeconomics
5. Consumers and Incentives
6. Sellers and Incentives
7. Perfect Competition and the Invisible Hand
8. Trade
9. Externalities and Public Goods
10. The Government in the Economy: Taxation
and Regulation
W3 Political Economy
11. Markets for Factors of Production
1 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Chapter 10
The Government in the
Economy: Taxation and
Regulation
2015.11.6.
2 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
1 Taxation and Government Spending in the United States
2 Regulation
3 Government Failures
4 Equity Versus Efficiency
5 Consumer Sovereignty and Paternalism
3 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Q: What is the optimal size of government?
4 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
• In the United States, governments (federal,
state, and local) tax citizens and corporations
to correct market failures and externalities,
raise revenues, redistribute funds, and finance
operations.
• Through direct regulation and price controls,
governments can intervene to influence market
outcomes.
5 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
• Although government intervention sometimes
creates inefficiencies, it often results in
improved social well-being.
• Weighing the trade-offs between equity and
efficiency is one task of an economist.
• It is up to each individual to decide when and
where government intervention makes the
most sense.
6 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
10.1 Taxation and
Government Spending
in the United States
Three levels of government:
• Federal
• State
• Local (city, county)
All can collect taxes and spend revenues.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.1 Total Government Spending and Total Government Revenue as aPercentage of National Income (1929-2011)
• Budget surplus: Tax revenues are greater than spending.
• Budget deficit: Spending is greater than tax revenues.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Where Does the Money Come From?
Exhibit 10.2 Federal Revenue by Category in 2011
• Individual income taxes : 47%.• Payroll tax: also known as social insurance tax, is a tax
on wages that employers are required to withhold from
employees’ pay.• Corporate income tax: taxing profits earned by
corporations.• All other taxes: including excise taxes, which are taxes
paid when purchasing specific goods.
9 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.2 State and Local Receipts by Category in 2011
• All Other: 30%, miscellaneous taxes and fees, including
tolls on roads, sales from public transportation tickets,
vehicle licenses.• Revenue from the Federal Government : 25%.• Sales tax: 18%.• Property tax: 17%. To fund schools, libraries, and public
services such as police and fire protection.• Individual income taxes: 11%.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Why Does the Government Tax and Spend?
1. Raise revenues to pay for public goods
2. Redistribute income to address fairness issues
3. Finance operations of government
4. Correct market failures and externalities
11 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
1. Raising Revenues to pay for public goods
• National defense and Social Security comprise
the two largest categories of federal spending.
Exhibit 10.4 Federal Government Spending by Category in 2011
12 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.5 State and Local Spending by Category in 2011
• The two biggest items of spending for state and
local government are education (27%) and
public welfare (16%).
13 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
2. Redistribute income to address fairness issues
Governments can address equity issues through:• Transfer payments
• Government payments to individuals or groups.
• Tax structure• Progressive income taxes to limit inequality and
distribute the tax burden more toward the rich.• In a progressive income tax system, high-income
individuals pay higher average taxes and higher
marginal taxes.
14 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.6 Federal Taxes in 2013 for a Single Individual
綜合所得稅稅率級距 (2013年起,臺灣), 綜合所得淨額
• 52萬元以下者,課徵 5%。
• 超過52萬元至117萬元者, 12%。
• 超過117萬元至235萬元者, 20%。
• 超過235萬元至440萬元者, 30%。
• 超過440萬元者, 40%。15 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.7 The Distribution of Income and Federal Taxes 2010
16 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
• Average tax rate is the total tax paid divided by
total income earned.
• Marginal tax rate is how much of the last dollar
earned the household pays in taxes.• In a proportional tax system, households pay
the same percentage of their incomes in taxesregardless of their income level.
• The marginal and average tax rates do not vary with
income.
• In a regressive tax system, the marginal tax and
average tax rates decline with income so that
low-income households pay a greater
percentage of income.17 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.8 Three Tax Systems
18 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.9 The Pre- and Post- Tax Income Share of the Top 1% and Bottom 20%from 1979 to 2010
• As a result of transfer programs and progressive taxation,
the post-income tax income distribution in the United
States is more equal than the pre-tax income shares of
the top 1% and the lowest 20% of households.
19 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
3. Financing operations
• Paying for the day-to-day running of
government operations and services.
4. Correcting market failures and externalities
• Although important in principle to correct
market failure and externalities as discussed in
Chapter 9, taxes are not usually levied to deal
with a specific market failure.
20 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
歷年台灣政府總預算 (單位:億元,2016為預算數。)
21 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
22 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
23 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Taxation: Tax Incidence and Deadweight Losses
Who bears the burden of taxes— meaning, who
actually pays the tax?
• The tax burden can be shared between a buyer
and a seller even if it seems to fall on just one of
them.
• Tax incidence refers to how the burden of the
tax is distributed across various agents in the
economy.
24 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.10 A $2 Tax on Producers
• There is a gap of $2 between what the consumer pays and
what the producers receives, resulting from the $2 tax.
• Not all of the $2 tax falls on the producers: the consumer
is paying $1 more and the producer is receiving $1 less.
• The tax incidence on consumers is equivalent to 50% of
the tax, even though the tax was placed on producers!
25 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.11 A $2 Tax on Consumers
• There is a gap of $2 between what the consumer pays and
what the producers receives, resulting from the $2 tax.
• Not all of the $2 tax falls on the producers: the consumer
is paying $1 more and the producer is receiving $1 less.
• The outcome is identical to the case in which the tax was
imposed on producers!
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
The Effects of Demand and Supply Elasticities on the Tax
Burden
• In competitive markets, tax incidence and equilibrium
prices and quantities are independent of whether the tax
is imposed on consumers or producers.
• When the supply curve becomes more elastic, the buyers
bear more of the tax burden.
Exhibit 10.12 Tax Incidence When Supply Is More Elastic than Demand
27 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.13 Tax Incidence When Demand Is More Elastic than Demand
• When the demand curve becomes more elastic, the
producers bear more of the tax burden.
• A general rule: The tax burden falls less heavily on the
side of the market that is more elastic— that is, more
responsive to price changes.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
10.2 Regulation
Direct Regulation
• A common form of government intervention
in markets is direct regulation (or
command-and-control regulation.
• Direct regulation affect just about every walk of
life, from the safety of foods and drugs to the
miles per gallon our automobiles achieve to
when we can drop out of school.
• Regulation has costs and limitations.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Price Controls:Price Ceiling and Price Floors
Price Ceilings
For example, rent control.
Exhibit 10.14 The Effects of a Price Ceiling
30 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Exhibit 10.15 Consumer and Producer Surplus with Rent Controls
• If rent-control is so clearly welfare-reducing,
why do we have it in practice?
• Winners and Losers under rent-control?31 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Price Floors
• Price floor represents a lower limit on the price
of the product or service.
32 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
• Why is there a shortage of babies available for
adoption?
• Why is there a shortage of organs available for
transplant?
• Why is there a shortage of spaces in magnet, or
accelerated, public schools?
33 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
10.3 Government
Failures
• Although many government interventions have
well-defined, worthy objectives and some of them are
essential for the proper functioning of markets, they also
create a range of inefficiencies.
• Those include deadweight losses of taxation or
inefficiencies from price controls or direct regulation.
• Also include a broader set of inefficiencies associated
with government interventions, sometimes called
government failures.
34 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
The Direct Costs of Bureaucracies• Every government program needs bureaucrats and
bureaucracies to monitor its implementation.
Bureaucrats have to be paid.
• They are also taken out of the productive sectors of the
economy.
• In the absence of regulation, these workers would have
been productive in other jobs, and this is the
opportunity cost of government work.
• The allocation of time and talent of individuals to
bureaucracy is an important cost of government.
• The cost is increased by the fact that bureaucracies
sometimes (?) don’t function efficiently.
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Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Corruption
• Corruption refers to the misuse of public
funds or the distortion of the allocation of
resources for personal gain.
• Foe example, in the last 60 years, more than $1
trillion has been transferred from developed
countries to Africa, only 5% to 15% reaches the
recipient!
• Why evaluating government policies, those
costs of government have to be considered.
36 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Underground Economy• The underground economy, also referred to as the black
market, includes activities where income taxes are not
paid, as well as illegal activities, such as drug dealing and
prostitution.
• Problems underground economy generates:
• Undermine the ban.• Put legitimate business at a disadvantage.• To compensate for the lost revenue, governments
must levy higher taxes.• Resources spent by criminals trying to evade the law
and by authorities trying to catch criminals are not
effective use of society’s resources.
37 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
10.4 Equity Versus
Efficiency
Exhibit 10.17 The Equity-Efficiency Trade-off
• Where do you want to be along the curve?38 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
10.5 Consumer
Sovereignty and
Paternalism
• Consumer sovereignty is the view that choices made by a
consumer reflect his or her true preferences, and
outsiders, including the government, should not
interfere with these choices.
• Paternalism is the view that consumers do not always
know what is best for them, and the government should
encourage or induce them to change their actions.
39 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
• The Social Security system in the United States,
which forces individuals to save for old age, is
born out of paternalism.
• Laws that ban substance abuse are also
motivated, in part, by paternalism.
• By contrast, in a world with no externalities,
consumer sovereignty wold allow individuals
to consume as many drugs as possible, even if
they are addictive and potentially harmful.
40 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
The Debate
Government should help consumers make choices
because:
• Some decisions are very complex and
individuals don’t have enough information.
• Some mistakes result form the fact that
individuals are not used to making decisions of
a certain type.
• If an individual behavior benefits the larger
society, the government should encourage that
behavior.
41 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Consumers should be allowed to make their own
choices because:
• How can the government (or some group of
people) know what’s good for us?
• How can we trust the government to really
have our interests in mind?
• How can we distinguish between differences in
opinions and preferences and those cases in
which people really are making mistakes?
42 / 43
Chapter 10
The
Government in
the Economy:
Taxation and
Regulation
Outline
Taxation and
Government
Spending in the
United States
Regulation
Government
Failures
Equity Versus
Efficiency
Consumer
Sovereignty and
Paternalism
Q: What is the optimal size of government?
• This is a difficult question to answer.
• An economy needs some amount of law and order, some
national defense, some regulation, and so on.
• Two specific areas to make our general point to think
about the optimal size of government.
1. A major efficiency loss of taxation is deadweight
loss.
2. The government typically operates in a
slow-moving manner. A significant drag on the
economy can result if regulators can not move
swiftly in response to changing market conditions.43 / 43